Student loan advice

[vass]

The only debt I carry is my HECS/HELP debt (Australian student loans.) Mine is much larger than the average of $15,000, because I was at uni for three years longer than the norm for my course, and had to repeat a lot of classes due to disability issues which still affect me.

Australian student loans are government-owned, and are adjusted according to the consumer price index, but otherwise do not attract interest. No repayments are needed until the debtor reaches the repayment threshold, currently $44,912. I make nothing like $44K. I really don't make a lot of money at all.

If you make a voluntary repayment of $500 or more, you get a bonus of 10% on it, i.e for $500 the government wipes out $550 of your debt.

I don't like being in debt, even debt as benign as HECS/HELP. It hurts my pride.

If I saved as much extra as I could manage per month (on top of my normal savings) in a 5% savings account, then repaid that year's savings, including interest, and kept doing that every year until the debt was gone, it would take me 20 years (not accounting for inflation, because I have no idea how to do that, and I can't find a website that will give me a guideline. Any suggestions? At any rate, I hope and trust that it's less than 5% p.a.)

If I saved the same amount per month in a 5% savings account, then didn't repay it until I reached the target amount (again, without accounting for inflation) and then repaid it in full, it would take me 15 years.

Obviously, I'm hoping that I'll earn a higher annual income over the next 15-20 years, and be able to reach my goals sooner and form some new ones. But I want to start now.

The other thing to consider is that if I reach the repayment threshold, it will take me 15 years to repay my debt if I pay the minimum every year. And I don't know when (if ever) I'll reach that minimum threshold.

I guess what I'm looking for is support to do the smart thing and put the money in savings so I can repay it faster, not repay it five years slower just because it's psychologically more satisfying to see the numbers go down instead of seeing them actually go up through indexing.

Comments

[all_adream]

Good, thank you: that is succinct, and the only question I would have would have to do with the possible benefits of the extra ten percent on payments over 500, and if doing those in a staggered way would eventually pay off, since 110% of a certain figure being paid off at once could indeed reduce the rest enough to make it worthwhile to do at intervals.

[jamethiel]

Think about it in terms of interest saved = interest gained.
With our example above, it takes 10 weeks (2.5 months) to save $500. The amount of interest you will have earned in that time from the savings account is $3.01. So your payment of $503 becomes a payment of $553.00 (The ATO doesn't count the cents in a HECS debt).

You do this five times a year for the first year. That is... $265 interest. Every fifth year, you get $318, because it takes that long to make an extra payment.

In the first year, you make payments of $2765. Your $10 000 debt becomes $7235 and then $7372 after indexation (I'm using last year's indexation of 1.9%). That's $137.46 of interest lost, so your interest overall for the first year is $127.54.
With indexation and extra interest from the 10% and the interest from savings, it takes you three years and 9 months to repay your debt. Over that time, the interest (Taking into account all of the bonuses from the 10%, all of the interest for the short time you have your money in the savings account) is $693.24

(I've done those calculations if you want to see them)

After three years if you leave the debt alone and assuming indexation is 1.9%, the debt is at $10580. The amount that you have to pay to pay out the debt is $9620. You reach that in your savings account after 40 months, which is 3 years and 4 months. Five months sooner than you repay your debt with the gradual repayment system. The interest earned from your savings account is $1000, take away the $580 of interest lost from indexation and you have $419 of interest. Then you apply the 10% bonus, and all of a sudden the money you have earned through interest becomes $1381.

So. You get to pay your debt off five months sooner and you earn around twice the amount of interest.

[all_adream]

I see how these options get down to whether the original poster has strongest feelings about sooner or about less or about other factors involved, plus the wildcard aspect of maybe winning the pools or getting more or less income somehow unexpectedly. Thanks for all the calculator action!